Road to Ruin: Tesla vs. Auto Dealers

Tesla Motors, the famed electric vehicle startup from billionaire Elon Musk, is feeling the full brunt of auto dealers associations wielding antiquated regulations. On March 11th, the state of New Jersey, facing complaints from the New Jersey Auto Dealers Association, banned Tesla from selling its electric cars directly over the internet from the factory to consumers.

Consumers want to customize and order Tesla cars direct from the factory online, but many states continue to ban the direct sale of cars from the manufacturer to the consumer. There are dozens of highly competitive car manufacturers in the United States, so why have state and federal governments propped up this business model? It has all been done in the name of protecting the consumer.

Often when consumers feel that companies are overcharging for their product, they demand action from the government in the form of competitive regulation. Governments must do something to stop the monopoly or oligopoly to protect consumers from usurious prices. Utilities are the most commonly used example. Electricity and water distribution are natural monopolies: industries with vast economies of scale that if left unregulated would lead to a single dominant firm. Governments must regulate these industries to protect consumers from extortionate pricing. But, in many cases regulations become tools of companies to protect their own profits often at the expense of the consumer.

Early in the 20th century the nascent automobile industry consisted of only a few firms, all of whom wanted to expand rapidly. In the 1930s states regulated the disintegration of car retailing and manufacturing to create a competitive retail industry that would prevent oligopoly pricing and stop manufacturers from undercutting independent franchisees. The National Auto Dealers Association (NADA) still uses this argument today, saying “[i]f Ford sold cars in its own stores, what incentive is there to sell a Focus for less than Ford’s suggested retail price?”. The answer is obvious to Tesla and other manufacturers: a consumer can buy a comparable model from dozens other manufacturers available in the United States. There is no need for regulating car retailing now that the industry has so much more competition, particularly from the dozens of international manufacturers.

In a Department of Justice competitive advocacy paper, Gerald Bodisch wrote that the current regulatory model raises car prices over $2,000. Worse yet, consumers revile the car buying experience so much that they would prefer to avoid auto dealers entirely even if it saved them nothing.

The successful political maneuvering of auto dealers associations to prop up old, unnecessary regulations in New Jersey and elsewhere is hurting consumers and slowing the diffusion of new vehicle technology. The federal and state governments must act to modernize or eliminate the anachronistic rules and support the interests of car buyers instead of the bottom line of salesmen.

P.S.

For a bit of more reading on the economic cost of auto dealers, read Economic Effects of State Bans on Direct Sales to Car Buyers.

Updated for style April 3rd, 2014

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Filed under Business, Economics, U.S.

An Economist’s Take on Digital Paywalls

From premium newspapers like the Wall Street Journal and the New York Times to made-up news weeklies like Weekly World News to the satirical magazine The Onion, nearly all news websites have adopted, or at least tested, a paywall for online readers. Yet, prominent economists have discovered gaping holes in a business strategy that has almost become industry standard for turning online content into profit and recouping hemorrhaging ad revenues.

Economists Susan Athley – a Jon Bates Clark medal winner – Emilio Calvano, and Joshua Gans released a new study on online news paywalls last week. Their analysis pointed to a high cost to erecting a pay wall for online news magazines. They state that “[i]ntroducing a paywall does not just diminish readership, but it furthermore reduce (sic) advertising prices (and leads to increases in advertising prices on competing outlets).”  If one newspaper institutes a paywall while the other does not, the other newspaper will have higher readership. Therefore, the competitor will be able to receive higher advertising prices, because they will be able to attract more advertiser links. And if those alternatives outlets have more revenues, they can produce higher quality content, further digging a paywalled competitor’s revenues.

The theoretical paper arrived a month too late for the U.K. newspaper The Sun. In August after erecting a paywall, the first month The Sun put up its pay wall readership collapsed 62 percent and the average time spent online plunged 64 percent. The total loss in consumer attention was an enormous 128 million minutes, nearly 86% of the level before the paywall. Adding insult to injury, and as predicted by Athley et al., readership soared at The Mirror and other online, free, U.K. newspapers with similar online content.

The experience of The Sun opposes that of The Times, whose parent company earned over $150 million from online subscriptions, and the Wall Street Journal. However, both newspapers are the pinnacle of American journalism that, unlike The Sun, have few substitutes: The Times has earned 119 Pulitzer Prizes and the WSJ has 34. Even then, it has not been a smooth transition; The Times recently cut the price of a digital subscription when subscriber growth stagnated.

The competition for an online readers time is now too great for newspapers or any online media platform to provide anything but top quality content. For newspapers like The Sun that face a huge swath of competitors in the U.K., paywalls are a disastrous solution to collapsing advertising revenues if they cannot provide unique, engaging content.

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Filed under Business

The Argument for Better Access to AEDs

I recently took my very first First Aid course with CPR and AED certification for St. John’s ambulance and I was astounded to learn how effective Automatic External Defibrillators (AEDs) are at saving lives. In cases of cardiac arrest, an AED can double the rate of survival from an out-of-hospital cardiac arrest (Weisfeldt et. al.). In cases of cardiac arrest, every second counts. Defibrilation and CPR must be started as soon as possible to maximize the chances of survival and to maximize quality-of-life after a heart attack.

The most recent versions of AEDs are idiot-proof. You simply place the sticky pads on the follow the directions which are essentially put the pads on the casualties chest and press a couple of buttons. They can be used with little or no formal training. Furthermore, the risk of delivering an unwarranted shock is negligible since the systems are designed to only shock people with the two life threatening types of cardiac arrythmia.

Despite their life-saving efficacy, the American Heart Association only recommends that an AED be installed if their is a 1 in 5 chance per year that it may be used. Even as far back as 2003, at least one study found that this recommendation is far too restrictive (this study also included substantial training costs that authors believe may not be necessary).  Since 2003, costs have fallen solidifying the argument that AEDs should be placed in many public places.

Given the substantial benefit, why aren’t AEDs more available? There is little economic incentive for most heavily trafficked public spaces to have an AED. There is no responsibility for public organization to intervene in medical emergencies, and in many cases they may be worried about liability in the case that they misuse an AED. Consumers might decide to frequent public places and store that have AED access, but they don’t have the necessary information about the location and effectiveness of AEDs.

Overall, Canada and other governments should be looking into more ways to economically increase  the accessibility of AEDs. Government programs to increase AED access could greatly increase the survival rate of heart attacks in Canada. So far in Canada the government response has been limited. The federal government announced a $10 million program to provide AEDs at hockey rinks, but this ignores the multitude of other public places where AED access could save lives for relatively low cost. At the provincial level, only Manitoba has regulation requiring AEDs. Many major centres have AED programs, but rural areas – where EMS service is generally slower and AED access more valuable – lack the resources.

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Filed under Economics, Uncategorized

Why Egypt Could Fail

I’ve finally had a chance to read Why Nations Fail by Daron Acemoglu and James Robinson. It provides a useful tool for looking at the President Morsi’s attempt to centralize power in his own office could damage Egypt’s fragile economy.

In Why Nations Fail Daron Acemoglu and James Robinson reiterate throughout that politically inclusive institutions, strong economic institutions, and sustainable  economic growth go hand-in-hand. Their analysis reinforces how damaging it could be for Egypt’s president Morsi to centralize power in the president’s office.

Under military-dictator Mubarak, over half of all Egyptians lived on less than $2 a day, and economic wealth largely centralized by a tiny elite. However, political power was centralized and largely undisputed for decades. Acemoglu and Robinson argue that some modest economic growth can be created under politically-exclusive and economically-extractive institutions: dictators need a bit of an economy to have any wealth to extract. But, they are doomed to collapse as higher levels of opression and constant in-fighting among the elite lead to revolution. As a result of some modest economic reform, Egypt’s economy did experience moderate growth under Mubarak – GDP grew by about 5% per year – but the oppressive regime inevitably fell apart as the Arab Spring moved from Tunisia east. On January 25th, 2011 Mubarak’s oppressive presidency ended. So far, the revolution has brought no economic benefit to Egypt. The resulting political instability has stunted economic growth, and led to a sustained double-digit unemployment rate.

Now President Morsi’s attempt to centralize power in his own office will do little to stop the current political instability, and even worse would rapidly create a politically-exclusive, even authoritarian, regime mere months after Egypt’s democratic election. Certainly, centralizing power in the president’s office would increase in-fighting between the Muslim Brotherhood and the Egyptian army. Not to mention that regular Egyptians would also surely continue to fight to try and reverse the president’s new powers through increasingly intense demonstrations. It seems almost unimaginable that such a tactic could reduce political instability. However unlikely, even if Morsi’s constitution did create some political stability,  it seems that Egypt’s economy has already attained the maximum amount of economic growth it can under politically exclusive institutions.  Egypt needs to continue to move in the initial direction of the revolution – toward more politically inclusive institutions and more political stability – to attain anymore economic growth.

Given the current stagnant state of Egypt’s economy since the revolution in 2011, centralizing power in Morsi’s office could actually undo the moderate economic gains made under Mubarak by replacing a centralized, stable, politically exclusive regime with an unstable, politically exclusive regime. Without continued political reform, Egypt’s economy and Egyptians will continue to suffer.

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Filed under Economics, International Development, World

The Cost of Regulatory Opacity

The Canadian government’s recent blocking of the sale of Progress Energy Resources to Malaysian state-owned Petronas has raised calls to act on the vagueness of the “net benefit” test applied to mergers in Canada over $331 million. The lack of clear criteria for this net benefit test has serious economic implications for investment in Canada.

When Canada blocks a merger it creates costs and uncertainty for Canadian businesses.

The potentially unfounded, or at least unclear, blocking of a major merger limits potential competition for the sale of Canadian companies, reducing the value of Canadian companies and increasing investor uncertainty.

Fewer takeovers could damage Canada’s labour productivity. Mergers and takeovers create new more efficient organizations by eliminating duplicate positions or centralizing administration that can make the Canadian economy more productive.

The unfounded (or at least unspecified) rejection of major mergers could create a more hostile environment for Canadian businesses trying to merge with companies overseas. Foreign governments likely aren’t going to allow Canadian companies to reap the benefits of mergers when their companies cannot.

The net effect is that every time that the government intervenes in business actions like mergers, it reduces business investment.  In a paper from the Cato Institute – a libertarian think-tank – George Bittlingmayer estimated that every antitrust case brought against business in the U.S. reduced investment a staggering $1.7 billion. At least in the case of antitrust cases in the U.S. though, the justification of why the merger or other action was blocked is clearly laid out. In the case of antitrust lawsuits though, the final outcome of the case and why the merger or acquisition is stopped is clearly laid out. When mergers are stopped in Canada under the Investment Act, the effect on depressing investment is amplified because no public justification is given.

Ensuring that Canadians are protected from monopolies and potential security risks is critical, and certainly may justify stopping some mergers. However, a lack of clarity on how the Canadian government actually weighs these costs to the benefits of major mergers creates an uncertain business environment that stifles investment throughout the country.

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October 22, 2012 · 12:53 pm

The Problem with Labour Moblity: Opportunity is not Enough

It is a well known fact that labour mobility is low in the E.U, despite the disparate strength of member countries’ economies. In fact, only 0.2% of EU citizens move to work in another country in any given year. Far lower than the 2% to 2.5% of Americans who change States in any given year.

Most commentators on Europe’s labour mobility looked at the practical barriers for EU citizens who are looking for work abroad: labour market regulation, employment taxes, cultural and language barriers. However, a 2010 study by the European Commission shows that most Europeans do not consider these to be the most significant barriers to moving.

The European Commission 2010 study on labour mobility shows that opportunity and economic hardship is not enough to make people move, nor are language or culture significant obstacles. First off, the recent economic hardship has correlated with a lower incentive for Europeans to move even within their own country. The number of Europeans who would move to a new region or country if they were unemployed fell from 66% to 48% between 2005 and 2009. Perversely, in Greece, the number of respondents who said they would move to a new country or region if they were unemployed fell from 67% to 38% in the same period.

The largest barriers to moving weren’t cultural or language. The top disincentives for moving abroad were leaving home, causing family distress, and leaving friends. Only 19% identified learning a new language as an obstacle to looking for work elsewhere.

Cultural barriers were very low on the list of practical difficulties that Europeans expected to encounter in working abroad. Only 16% of respondents identified cultural barriers as a possible practical impediment to looking for work abroad. And only 10% worried about getting their qualifications certified. Although language barriers were the number one challenge to working in another country, overall, only 10% to 20% of Europeans depending on the country expect that they would actually encounter any barriers to finding work.

Calls for eliminating labour restrictions within Europe would certainly help bring some balance to the European economy across regions, but it won’t be a panacea. Many European citizens are tied to their home countries through family or identity. Until there is a dramatic shift in attitudes toward working abroad (which is at least taking hold in younger, more educated generations), a lack of labour mobility will remain an impediment to the success and sustainability of the Euro.

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Filed under Economics, Europe, World

Quebec and the Riot Index

The Quebec government is now at it’s second impasse in negotiations with students over tuition  hikes. The Quebec government, which is mired in $159 billion in debt (up from $99 billion in 2004), is attempting to make spending cuts and generate new revenues wherever it can. The proposed 75% increase in tuition that would have left Quebec tuition still the lowest in North America, however, pushed students to strike and led to widespread demonstrations. No doubt, public concern over the widespread allegations of corruption throughout all spheres of Quebec’s provincial politics and industry and the passage of Loi 78 have done little to engender any sympathy for the Quebec government.

Demonstrations in Quebec have had attendance in the hundreds of thousands. The Quebec government seems to be trying to strike a balance on the Riot Index.

I was shocked when some young acquaintances riding the bulls on Bay Street first explained to me the theory of government that prevailed among their set, based on something they called the Riot Index.

Too many riots were bad for business, they allowed, but so were too few – a sign that government had become soft and inefficient. Prudent government squeezed until the mob rebelled, then increased spending just enough to prevent extensive property damage. Optimal social policy was a matter of dialling in the appropriate frequency of riots.

Quebec students and citizens alike believe that Quebec’s austerity measures have gone too far, resulting in over 100 days of demonstrations. Perhaps, the Quebec government hopes that they have managed to strike a balance on the Riot Index between appearing weak on austerity and social unrest – Quebec student unions seem ready to continue tuition negotiations again. On the other hand, if the Quebec government can’t get a handle on corruption, then they may never be able to gain enough trust from Quebec citizens in order to pass the needed austerity measures without provoking new demonstrations.

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Filed under Canada, Economics